Prologue Dear Reader,
Everything nowadays seems to require a prologue. Maybe it is because we require the certainty of knowing what has gone before and what is going to happen. I have tried in this booklet to pass on to you a broad view of the subjects and the disciplines you will need to exercise in your daily business life. As you expand each area will require you to delve more deeply and master the mysteries. This is not an academic treatise because, frankly, most are bloody boring. Too often an “expert� will take a small part of business and expand it into a full blown book as the most vital thing you have to know. My intention is to give you a broad look at the subject so that you are aware of areas and systems to come in your new adventure I have also tried to instil a sense of humour as there will be times when you feel you have never had one. You will need to laugh at other times if only as a release of tension. As you gain more experience you will be able to look back and reflect on the vagaries of life and smile - I hope. Your own business will be personal to you but the elements of SELL DO CASH and PLANNING will stand you in good stead whatever project you think up. Your ability to be critical and cynical will not do you any harm. The better you plan and control the better you will enjoy the fruits of your labour. And this is the whole point, isn't it? To enjoy what you are doing. To gain from the efforts you have put in to what will become an all-consuming passion'. Derek Ritchie
CONTENTS
CHAPTER ONE
INTRODUCTION
CHAPTER TWO
BUSINESS IS AN ONION
CHAPTER THREE
SELL
CHAPTER FOUR
DO
CHAPTER FIVE
CASH
CHAPTER SIX
PLANNING
CHAPTER SEVEN
COOKING THE BOOKS
CHAPTER EIGHT
GLOSSARY OF TERMS
CHAPTER 1 Introduction More businesses go bust than survive. I started my career working for my family business. I decided after a number of years that I would do better in the outside world standing on my own two flat feet - and my family agreed! Over the next twenty years I had an exciting time in a wide range of different jobs in a number of industries. At the back of my mind was always a dream to get back to running my own show. The welcome addition of a wife and three children meant that I had to opt for security and loads of dosh. Finally I was a Company Director and had reached my level of organisational incompetence. I was offered an opportunity to be "downsized" and I leapt at it. I had some money and here was the chance to realise my dream and start my own business! Looking back, which I seldom do, I am stunned by my supreme confidence and lack of preparation. In the ensuing years I have started three businesses all of which are trading. It was not until the advent of the recession that I can honestly say that I had to learn more about business than I thought I already knew. During one recession I had a friend who went bust (one of many). As his disaster unrolled we would talk about what had gone wrong. I felt real sympathy for him and his family as he had tried so hard. I did not think, however, his experience related to me as I had run my business for years and knew what I was doing - didn't I. In the succeeding years I went on to prove that I knew the square root of buggar all about running and controlling a business and that I would have to learn some hard lessons, very quickly, to survive. This book is dedicated to that intrepid band of rugged individuals who in spite of all evidence to the contrary want to run their own business.
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Hopefully you will get some assistance to avoid the pitfalls I have fallen into with monotonous regularity and end up enjoying being your own boss - as I do.
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CHAPTER 2 Business is an onion If you look at a business you will see it in the round - it’s outside shape. This is especially true if you think of big companies who are promoting a big image such as say British Telecom or Supermarkets. What you will see is the outer skin of the onion shape they want you to see and remember. This is their way of standing out from the competition. Having gone to great expense to get you to recognise their onion they reinforce this with constant references to the product or service. You only have to watch television for half an hour to see an amazing range of comedians and cartoon characters with which you are supposed to identify the Company shape. You are not required to see the inner workings of the company or its problems. This is a far cry from when you plant a tiny seed for your very own onion but the reality is that you must build up layer on layer until you have your own "shape"--whatever size it is going to grow to. "What the hell have onions got to do with it (apart from grocers)?" I hear you say. I was quite enjoying the analogy, as it happens, and I was trying to introduce the thought that your business will require a whole range of skills most of which you will not have thought about before. There is no justice in the fact that as a small business "person" you have to know more about your business than the highly paid Chairman of a Public Company. He will have a range of highly paid "experts" that you will not have the money to even consider.
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Which reminds me that the definition of an expert comes from the Latin as I am sure you are aware -"ex" meaning has been and" spurt"- a drip under pressure. You may think that last comment cynical but a healthy disrespect of experts will stand you in good stead in your new career. It will also make you value a good one when you find him or her.
Why start? There are hundreds of reasons for starting your own business: You don't like being told what to do. You've always wanted to do it. You are not getting paid enough for your efforts. You have a great idea. You know you could do it better. You have been made redundant. All the above applied to me and without too much thought I launched into my adventure convinced there would be no chance of failure. In fact I know that I did not even consider failure. So here you are standing on the threshold of a new life, nervous and excited at the same time, but determined to show them you can do it. What is the first thing you should do? STOP RIGHT THERE! Running your own business can seriously damage your health, wealth, family and friends. At this point you have not committed anything to the venture and you have a one off chance to stop and think. Once you start the business it will become an all-consuming passion with 5
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you and all your family. The effect of trying to stop it later, if you don't like it, is like running into a brick wall at fifty miles an hour! You and I both know that your idea is not going to fail - but many more fail than succeed. This is the time to evaluate the one asset that you know something about -YOURSELF. I have a secret passion for those questionnaires in newspapers and women's magazines. You know - the ones that seek to give you a glimpse of your character, leadership ability or whatever by asking a series of questions with three possible answers. I usually come out in the top percentage. Why? Because I cheat and read the answers upside down but at least I know I'm cheating and this is what you can not afford to do at this point. Be honest with yourself. Ask yourself a few questions in a darkened room before starting the next stage. Does my husband/wife agree with my idea? Am I good at making my own decisions? Do I mind working long hours at a low rate? Do I know enough about the Product/Service? Do I know enough to control the business? Is this the only decision available? Feel free to panic at this point, because you will have plenty of time to develop it into an art form should you decide to go to the next stage. I won't attempt to give you endless lists to sort out your particular situation, because it won't work. You know what you are trying to achieve and the reasons for doing it. At this point you have been swept along on a wave of enthusiasm for your idea, or you are in a state of fear that is telling you there is no other thing to do.
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So go away quietly. Review the situation. Talk to your partner. Talk to your children. Talk to your friends. Sit down and think again. This is pretty miserable stuff I hear you say. There is a great adventure out there and you can be that intrepid buccaneer cutting a swathe through the business and leaving your mark on uncharted lands: but there are sharks and dragons out there too! So let’s assume that you have come out of your darkened room determined to carry the flag and start your own business. We shall now be going to the heart of the plot where I will try to pass on to you the elements of setting up and running a small business - or a bloody big one. I will give you hints and advice that I have gleaned, at vast expense, from my experience to give you a chance to avoid some of the more obvious pitfalls. I can guarantee that you will generate other pitfalls of your own making that you can truly claim as yours alone!
My great idea! I was discussing business in a pub with a good friend of mine and he was bemoaning the inability of his partners to understand the regular need to make out invoices. They were professional people who had been trained in their skill to a high degree and they had been taught to believe that on becoming a partner their future was assured. Rather like we always thought bank clerks had a job for life. I realised that like many people they did not see their whole business onion and because of this picture, of themselves they were willing to endanger their business rather than do menial invoicing In a blinding flash, fuelled by a number of pints, it came to me 7
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"SELL, DO, CASH", I said, "That's the answer". A look of stunned incomprehension crossed the face of my companion as he tried to take in the sheer breadth of my vision. I did not care as my mind was racing with the clarity of my vision. "You've got to SELL something; you've got to DO something: and you've got to get your CASH in. It’s really very simple", I said. "If it was that simple everyone would be doing it ", said my friend. "I know, but the trick is you've got to do them all at the same time. And TIME is the most important thing of all", I spluttered. "Balls", said my friend rather unhelpfully. "Absolutely right. Think of three balls attached by elastic with the elastic meaning time. The longer you stretch time the longer it takes to get your money". "Seems a long time since we saw your money", came the reply. Paying the round with my usual grace I found that I could not get this theme out of my head. All right nothing is that simple but you need a picture in your own mind when you are trying to grasp the scale of things you need to know when running your own business. If you keep this mental picture of the three balls you will have to juggle endlessly connected by elusive elastic - then we can begin.
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CHAPTER 3
Sell "The ideal product costs less than a dollar and every home needs one". My wife, bless her, is unable to walk down a High Street without being stopped by a person in an anorak positively drooling to know her opinions on a seemingly endless range of topics or products. Being an obliging type she tries her best to be helpful. This results in me staring vacantly into shop windows for up to twenty minutes at a time. At least the last time she got a free pen for her efforts. So what is going on? Companies are trying to get a feedback from a "typical" consumer, or consumer to be, on their product or service. From this information they hope to be able to fine tune their approach to the market to make it more willing to accept oodles and boodles of lovely sales.
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This introduction has probably got you wondering what this has got to do with SELL - because everyone knows about selling don't they? The point is that when starting a business, and while running it, your Market is always changing and you need to know about it. So SELL cannot stand alone it has to be linked to MARKETING and RESEARCH. I’ll come on later to Planning but first what is your MARKET? In the heading to this Chapter I use the expression "ideal product" and there are very few such animals in captivity. Most companies will be a copy of an existing idea, an extension of your work experience, or a niche you hope you have found before anyone notices. I also notice in the heading the word "need" and again there are very few products or services that are vital. Remember water is a "need" and sex is a "want". You can live without sex but you can't survive without water. You must find out why your business should be added to the pool and whether it will float-or sink!
A few ideas Talk to people already in the Market Some will tell you to get stuffed but most people will be flattered and will give a beginner a lot of useful information and endless advice. Look at possible sites for your business. Most people buy a business in sunshine. Go and look at the site on a wet Tuesday in winter. If you want passing trade actually spend time to count the number of people passing - if any. Talk to potential Clients. 10
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If you are thinking of an idea linked to your last job then you may have "friends" amongst your previous clients or suppliers. These people may be willing to help you start. Equally you may have made "enemies" who will be only too happy to kick you in the crutch now they can do it safely. It’s worth finding out. Tell people what you are thinking of doing and see how they react to your idea or service. Don't worry about giving away the great idea as most people are too lazy, or scared, to start their own business - they like to dream - if only. Research the Market. I mean read the trade mags, visit the Library, read published accounts of potential competitors, look at Yellow Pages. I always turn to this last one when I think I have a great idea - and let's face it all our ideas are great. Just turn to the section that covers your proposed idea and count the number of other companies giving a similar service. "Bloody Hell" you didn't realise how many there were. If this is the case then a re-think may be in order. If it is a small number then divide the number of entries into the population in the area you hope to service and you will have a rough guide to a first Sales Budget. That is how many Sales you might take away from the competition - if you are lucky. Franchises A franchise is where an apparently successful company lets you use their name or product to set up your business. The hook is that you will benefit from their market image (onion) and you will be successful in a shorter period of time than if you had started on your own. In practice there is a bewildering range of franchises available ranging from beefburgers and drain cleaning (both ends of the market) to the frankly bizarre 11
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In reality the company is expanding its sales with your money and will expect fees ranging from a few hundreds to hundreds of thousands for the privilege. The need for market research and budgets are as vital here as in any other start up - watch the salesman.
Budgets I see I have introduced a new "buzz word" here - BUDGET. Let's face it, at this stage in planning the great gamble a Budget is only your best guess as to what you hope might happen. The advice above is to get as much information as you can to limit the size of the guess. In the end all Budgets have an element of faith and hope built in. Your main aim should be to avoid being a charity. When you get hard information later, based on actual figures, you will be able to be slightly more accurate. Even Gypsy Rose cannot predict the future. A Budget is based on historical information assuming the future will be like the past - but better. This lack of accuracy will not stop a wide range of people such as your Bank Manager and your Accountant asking for Budgets They will require a budget to give them faith in your idea. They will also use it as a reference should you stray from the Plan. If you gently explain that this is your best guess, your street cred will fly out of the window. If you explain that you will update the figures on a regular basis as you receive more information then you will be seen to be keeping on top of the situation. This will benefit you as well as things have a habit of changing without you noticing - with unexpected results. So now you have done some Market Research and have the start of a possible Sales Budget. We are not finished yet but if the idea still stands up then you have got to stage one.
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Marketing is something that you will return to all through your career and if you don't - remember the Great British Motorbike. Here was a product that was the pride of the post war world. It had all the solid image of us Brits. To our Grandparents it was one of the first forms of mass transport available. They could have the freedom of runs in the country whenever they wanted with Gran in the sidecar wrapped up against the rain. Granddad could gleam with pride as the huge cylinder majestically fired every time it passed a telegraph pole. Like the Empire, the market would last a thousand years. But it didn't. Gran began to be fed up getting wet and with post war affluence Granddad bought a car. The children wanted a bit more flash. Along came the Japanese, their whole philosophy is marketing, and they saw the change in demand and satisfied it. You have probably ridden the result and it wasn't British. We come into this world screaming and struggling and we probably go out the same way. In the bit in the middle we tend to forget that our real asset is ourselves. We try to hide behind all sorts of disguises be they clothes, attitudes, or things. We can easily forget that the way people relate to us is by the way they perceive our personality and how genuine this is - or not. Selling is a mix of the product and the person. One of the greatest insults that we as a nation can inflict on someone is to say “He’s a typical salesman.” What we are implying is that he is a lying, smarmy, pushy, conniving, bastard who will do anything to get his hands on our hard earned cash.
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Advertising There are a multitude of ways to advertise and a range of linked costs. One business I started used cards in shops plus two line ads in our local free paper. In the end these produced 80% of my Sales. The key is to be there when someone says “where is that ad?”. There is a wide range of electronic ways to advertise such as Facebook, U-Tube, a website etc. All these require regular updating and attention to be fresh. A friend has spent four years developing a successful website and he is plagued by fraud –in spite of so called secure sites. The last two of my businesses I have run grew from me targeting the type of client I wanted (those who paid) and going out and getting them. You have to work at getting to know your customer and his "wants". He has to get to know you and trust you. A fancy prepared spiel will seldom get you past the front door. I can remember from my days on the road the number of scabby dogs I have admired, the new hairdo of the receptionist, or an endless re-run of a match where our team didn't win. Customers are people and so are you. Extend them the same courtesy you would expect and don't be put off when you find that a percentage will try to make your life hell--just for fun As a very young sales man I presented my card at the door of what I fervently hoped would be a new customer. I was shown into the boss's office and I went through all my samples extolling their virtues. After a while I fell silent and the silence dragged out "Mr Ritchie'", said my soon to be new customer, "My father dealt with your Grandfather and had fallen on hard times. We went 14
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to see your Grandfather to ask him to extend our credit. Your Grandfather refused thereby making things very hard for my Father. I would never buy anything from your Company even if I was desperate". So you can't win them all - and you won't. In summary then:
Investigate your market
Define its size and shape
List the advantages of your product
Test this against your competitors
Prepare a possible Sales Budget.
Examine your Sales Approach
Learn from your experiences
Try again
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CHAPTER 4
Do "It takes twelve months to get a year’s experience” This is the exciting bit that you have all been waiting for -the chance to get your hands dirty, get stuck in and DO things. Time to commit yourself to your own business. STOP. "Not again", I hear you say. Experience, that's the key and you can't get it till you have done it can you? It’s a Catch 22 situation and you could limit the risk in a number of ways:
Work part time in the business of your choice.
Make some trial products
Try selling the service or product in a small way.
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This approach will let you see the business from the practical side and in most cases will open your eyes to whole areas you have not considered. Needless to say when I set up my first business I did not think of this simple approach. I had run a number of factories producing the goods I planned to make and was considered a bit of a Management whiz. When I had the call to be self-employed (or downsized) I was sure I knew enough about the product to be able to make it. I acquired the equipment and a site to make the goods. After a couple of weeks I had proved conclusively that I could not produce the required quality - and I had a pile of crap stock to prove it! I had also acquired a partner. In a very short time I had no output and no partner. I'll come back to partners later. In the end I learned a very useful lesson - not that I enjoyed it at the time. I changed to a less demanding product and the business built up over a period and I later sold it The main lessons were:
Don't underestimate start up time
Know your product/service
Know the required quality
Be flexible
Survival is the prime directive
Organisation One of the first questions you will need to ask yourself is what type of business organisation you are going to establish. There are three main types 17
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1. Sole Trader 2. Partnership 3. Limited Liability Company
Sole Trader As the name suggests you are the business and its principal asset. In effect you will be treated as a self-employed person by the Tax man and have the benefit of claiming a range of expenses to set against costs This is the least costly way of starting a business and your Tax returns are simplified and therefore your accountancy costs are low. You will find that your potential creditors may be a bit wary to begin with and limit your credit. As you begin to trade this should ease.
Partnership Many people faced with the jump to running their own business feel happier if a likeminded individual will take the jump with them. You'll also have someone to talk to in the quiet moments. I have had a number of partners and I remember them all and thank them for putting up with me. As in a marriage you do not know what it will be like after the initial excitement dies down. When you have to continue the daily slog the little habits you thought so endearing can begin to grate. The most usual complaint is that one or other partner is not working as hard as the other or he is taking too much out of the pot. There is also the difficulty of making a decision if you are equal partners.
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Do not forget that if a partnership fails the creditors go after the partner with any money left and that might be you. In the end I discovered that I wanted to be the Boss - the ultimate ego trip.
Limited Liability Company This is the most expensive way of starting but it seems to be the one that most people have in mind. It may be because the words "Limited Liability" give a feeling of protection We've all heard the stories of the crooks who have set up companies, cleared a bomb, and gone bust and started again the next day as though nothing had happened. The only people who have suffered are their employees and creditors Most people set up a business as a long term commitment and I am assuming you are not a crook (if you are you've probably nicked this book anyway). A Limited Liability Company will give some protection against creditors. However if you trade fraudulently your creditors can sue you personally anyway. The company will also incur higher costs as it has to be audited annually depending on its size and your records have to be well maintained for your accountant. However a Limited company is a living entity in its own right and one day will have a value. You can also organise benefits such as pensions more effectively Think of this as the next stage to go to when your trade is sufficiently established to carry the extra cost. NOTE Some people find the word Director/Boss a heady excuse to purchase a muscle car, snakeskin shoes and a white suit and live 19
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above their cashflow. Our old friend TIME will tell. So please wait until you can afford the lifestyle.
Inside influences - YOU running the Company If you have worked in a company you may have seen the Organisation Chart. This chart shows a pyramid structure setting out the chain of command. At the top are the Directors and at the bottom are the Workers. Little lines join the various departments and these are intended to show the flow of information up, down and across the pyramid. Of course it does not work because everyone knows that the Chairman's Secretary is the one to ask for the real info. The chart does have one use, apart from wallpaper, in that it shows you the number of hats you are going to have to wear in the course of an average day.
Your Hats TRILBY HARD HAT BOWLER FLAT CAP TOP HAT
------------------------SALES ------------------------PRODUCTION ------------------------ACCOUNTS/FINANCE ------------------------WORKER ------------------------MANAGING DIRECTOR
In the beginning you will have to wear these hats either separately or at the same time like a stand-up comic. After a while you may delegate some of the responsibility and allow other people to wear the hats. God help you if you do not regularly lift the hats to find out what's going on underneath.
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Outside influences - running YOU Just as you were getting used to the previous pyramid where you stand at the top you will find there is another one. This time the point of the pyramid is balanced on top of your head. This is what I call the inverted pyramid and is composed of all the non-productive people who require information. I'm always impressed by the number of Government departments there are who demand all sorts of information instantly on pain of death if not actioned this day. Just to cheer you up I'll list a few:
The VAT man.
The TAX man.
The Contributions Agency
All sorts of Statistics Departments
The European Union
GOD (well it just seems like it sometimes)
This list is not exhaustive as there is only so much you can take at one sitting. So now we have set up the company, made our stock, and we are about to venture into the outside world - LET BATTLE COMMENCE.
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CHAPTER 5
CASH There are no free lunches This is what it’s all about the exchange of CASH for the supply of goods or services All the hard work has been to get us to this point where you can live off the CASH you generate. It is also the area which will give you the most sleepless nights when CASH IN is less than CASH OUT. The ideal way to start and run a business would be if you could fund it all with your own money. Then you would have total control of how you ran the business. Unfortunately we come back to the old bugbear TIME. This is the gap between you spending money to attract custom and the time it takes you to get the money back at a PROFIT. If a friend asks you for fifty quid to get him out of a hole you would probably lend him the money expecting to get it back. You would not normally expect to charge him interest because that's not
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the business you are in. That is EXACTLY the business that anyone lending you money is in. On top of that they are NOT friends. To an extent the effect of borrowing money is for you to lose some control of your business. The amount of that loss is equal to the percentage of the total the loan represents. Let me tell you a story - my all-time favourite business joke HA HA! There was a man who had a brilliant idea but did not have any money (sound familiar so far) so he turned to two friends and when he explained the idea they could see it was a winner. They decided to form a company to exploit the idea. They had a Board meeting to elect Directors. The man who had put in £60,000 said, "I'll be Chairman as I have put in the most money". Everyone thought this only fair. "I've put in £40,000 so I'll be Managing Director" said the second friend to general agreement "What am I going to be?" said the brilliant inventor. "You can be our sex consultant" said the new Chairman. "What does that mean?” "When I want your f**king advice I'll ask for it" End of meeting. .
This "joke" sums up the feelings of some people when borrowing money. However to be fair it also shows that it is essential to have a good grasp of the realities of borrowing and for the need to plan ahead and to be aware of the benefits and dangers when doing so. If you are running a shop you will need stock. As you sell the stock you will have to buy more and you may have to buy more than you need immediately to get good terms. You will have to fund this. 23
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If you are making a product you will have to make items for stock. You will also have a number of items being made as work in progress. Whereas in a shop you will get a certain amount of CASH over the counter in a factory you may have to extend credit. When you extend credit you have to be very alert to the terms of trade you think you are giving and the terms your customer is actually taking. When you first start you will be very keen to get customers and you will extend credit terms some of which you will learn to regret. Learn from these mistakes and as a general rule if anyone does not pay on time DUMP THEM. Find other people who will pay, change your market, but make sure you get the CASH. I have spent many happy hours in the reception areas of debtors collecting cash. I even rolled up one Christmas to collect a debt -not my most popular idea. Having got my money I did not continue with any of those companies and I learnt to be more selective. The recourse to the Law should be considered as a last ditch effort if every other possibility has been exhausted (including you). In general it is preferable to chase the money yourself and, unless it will sink you, write it and the customer off. This may seem defeatist but you will get some bad debts and a single-minded determination to nail the bastard every time may mean you take your eye off the ball with even worse results. -
Cash Flow This is a lovely phrase which conjures up an image of you lying on a grassy bank in the sun while a smooth stream of money flows sweetly by. In reality the stream floods and dries up at times you may not expect - with interesting results. 24
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Let’s look at the two elements of Cash Flow: CASH IN CASH OUT
Your DEBTORS Your CREDITORS
your money their money
Cash In Prostitution is the ideal business in this area:
You've got the stock
The transaction is quick
You get the CASH IN
This business may not appeal to everyone but you can see that the key factor of TIME is very close to the point of SALE. It is TIME that rules the CASH FLOW. The length of time from the SELL/DO step will determine the amount of CASH you will require to bridge the gap. A very successful business man said “Everything takes longer than you expect. Do not assume the path to success is a short one or an easy one”. So there.
Cash Out Ironically this is the exact opposite of my previous homily. This is where you owe money to people and you want to have the longest possible credit terms available! Some companies are very casual in collecting their money. Equally there are others who come in with a boot on your neck at the drop of a writ. I class these as "soft" and "hard" creditors.
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A "soft" creditor, whilst useful at the time, can get you in more trouble as you take advantage of their lax terms and you can run up a debt that is difficult to repay. A "hard" creditor does ensure that you are up to date and limits your debt. You may not like it at the time but at least you know where you are. "Knowing where you are" is one of those vital aspects and I have a planning chapter coming up later. If you are struggling to pay a creditor then, as a general rule of thumb, talk to them. Since bankruptcy has become a way of life creditors are much more wary of a silent debt. Come out of the woodwork and tell them the situation and how you plan to pay them eventually. Don't expect them to be delirious but the prospect of getting their money will cheer them up.
Experts You may remember my previous comments about experts. However there will be times where you have to deal with advisers both in the area of borrowing money and finding out where it has gone. The most likely candidates are the Bank Manager and your Accountant. These two make up the bulk of the conversations that the self-employed have when relaxing after the rigours of the day over a well-deserved pint. This reminds me of the guy who went into his Bank and asked to see the Manager. "I'm sorry but he's dead", said the cashier. He came into the Bank for the next two days and got the same response. "I've told you he's dead for the last two days", said the cashier on the third day, "why do you keep asking?" "I just love to hear you say it", said the punter.
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I told that joke to my Bank Manager and I think he laughed. I must have been in credit that day.
The Bank Manager In times gone by the Bank Manager was a pillar of society who most people would only see in really serious cases such as the death of a relative. With the growth of small businesses the Banks realised that there was a market that could borrow money and be sold a range of "Financial" services. The Manager became a salesman and had targets for lending money and his customers borrowed it. There is no "risk capital" in this country - other than you lending fifty quid to a friend. The Bank requires you to pledge assets against which they will lend up to, say, 75% of its value. Doing this gives them a sense of security and they may not look too closely at what you are going to do with the cash. When a recession starts businesses crash and the assets drop in value, and the Banks find they had a lot of dodgy loans. Not unnaturally they do what you and I would do and PANIC. They call in the loans which causes even more panic and so we go down and down. So what has been learned from these painful times? Basically nothing. The Banks recover by stuffing up their charges to a, largely, captive audience and by writing off the dodgy loans. Some of the customers recover by dint of hard work and a battered degree of faith. Some never recover. The pendulum is swinging again and more people are starting in business and we will have forgotten that recessions come about every ten years –or sooner.
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The Banks are back advertising for customers, the punters are borrowing money, and still there is no risk capital. The good Bank Managers are trying to spend more time on business start-up but are under pressure, again, to perform. The Banks have invested in a range of twenty two year old "experts" with a laptop to give you advice on a wide range of subjects but don't ask a question that is not in the memory. To be fair you the customer are as much to blame. Very few people have ever tried to plan. Even if they do it is usually pie in the sky and they do not take the time to inform their Manager of what is going on. The principle of "Mushroom Management" i.e. keeping him in the dark and throwing shit at him is not a good idea. Your Manager will flower when you keep him in a light environment and give him regular doses of information. He can then see why things are as they are and you may find him surprisingly helpful.
The Accountant They say that the test of a good accountant is if he asks how much tax you want to pay. An accountant spends years studying accountancy and the law relating to it. The very nature of his trade is to get you into the "system". As with all outside experts he will bend your situation to suit a pre-prepared layout. They all do this because it is cheaper for them and for you. A "bespoke" system would cost a lot of money. The net result is that they are not inclined to look in great depth at your business unless the results fall outside the expected norm. It is up to you to know the true state of the business, as near as you can, so that you can assess the truth of the information being received.
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You will be held responsible for the accuracy of the information you produce-the expert is merely presenting it to the relevant authority—OOPS. Most people cannot be bothered with paperwork or say they have not got the time. This may be due to a natural dislike or an inability to understand it. Either way you cannot avoid it and the messier you make it the more money it costs for your accountant to sort it out. You also do not "know where you are" and it will cause you endless trouble. If you do nothing else at this time do this: Get two lever arch files. Call one PURCHASES and the other SALES. Number each Purchase Invoice as it comes in and put it in the Purchases file. Put each Sales invoice in the Sales file and number it. This is a better system than a shoe box and at least you can find things. It also allows you to think of a book system based on these files where you can record such things as payments in and out.
Computers It may seem old fashioned to be talking about “books” in the paperless age. We all are subject to computers in communication nowadays to greater or lesser degree. We should differentiate between simple returns or an accounts package. A number of Government agencies are insisting on on-line returns such as: HMRC for Tax and VAT PAYE and National Insurance etc.
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These last two items relate to your employing people and this does increase the complexity of your life and will need careful attention. You may need to do some courses to get ahead here. In many cases there will be a system for your trade or service which will be sold to you by a willing salesman who will say how easy it is to set up and run. Ask to see working examples and go and talk to the Companies using the system. Really listen to what they are saying and ask how long it took them to understand. I did all that and the boxes duly arrived and we had a one day training course. My wife and I agreed that we would put aside each Saturday morning to install the system. After a few weeks it was clear we had not got a clue what we were doing and the system was going to rot where it was. We were saved by number two son, who was always the one who set our digital watches, and knows this type of thing. After a year of intense effort we had the start of a working system. For most start up situations a simple set of books will carry you through to a turnover of at least £500,000. A majority of systems fail due to the lack of expertise of the installer. Remember that losing information on a computer is no fun and to put the information in the wrong place is a disaster. If in the final analysis you can’t tell the difference between a Nominal Ledger and a hole in the ground-get help.
Employees My son was stopped by a policeman for not having a rear light on his bike. He cockily explained that he was going to get a motorbike and would not be using the bike again. "God help you son," said the cop, "I'll be able to nick you for an even bigger range of offences in the future."
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And so it is with employees. When you go from doing it all yourself to taking on your first employee you will be met by a blizzard of legislation. You will have to do it if you want to expand and you must spend the time to understand what is required and how to fire the useless ones! This subject is big enough for a book of its own.
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CHAPTER 6 Planning "A rough guide to the future" It never ceases to amaze me, as I get older, how much time I spend planning when, in fact. I have less chance of getting to the end of the plan. When I was a young Work Study Engineer planning was all the rage and we used to chant PLAN ACTION - CONTROL to the steady click of the stopwatch. I can't rid myself of this habit and I am forever scribbling ideas and notes on pieces of paper for later plans I am impressed by my ability to "download" my brain on a range of plans or ideas - to little or no effect. The lack of effect is because it takes a disciplined effort to produce a plan worthy of the name. Why bother to plan I hear you ask again? There are two main reasons: You need one to check how things are going. Outside people keep asking for one. Remember the main elements. -
PLAN ACTION CONTROL
----------------------------------------------------
you make one things start happening why are they not going to plan!
Plans come in all shapes and sizes and levels of grandeur and most have a surreal quality that gives them charm.
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The main element of a plan is reality and not underestimating the TIME factor. As a general rule a plan will take twice as long to work as you expected and cost twice as much—ask the M.O.D.
Plan The first element of PLAN must be the TIME it takes to produce CASH and, hopefully, PROFIT. To start a business you will incur costs that you will have to fund. A list of START UP elements might contain;
Cost of equipment
Purchase or rent of a site
Purchase of stock
Telephone
Legal fees Insurances
Advertising
Stationery
Your pay - don't forget it' The list will be peculiar to the type of business you are starting but it will need to be made with care so that you can survive to reap your rewards
Action This is the time when you swing into action to sell your idea, product or service to a wildly enthusiastic world.
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I have found that two of the most essential things are:
Consistency
Availability Consistency reminds of that most unreliable man the window cleaner. This is a low cost business with instant cash flow. An ideal start up. It is also the business where very few people supply a consistent service. When you do find one he has a job for life. The clients respect a good service and want to keep it. Similarly you need to be easily reached by your clients. To have been found by a potential client who phones you and is answered by a harassed partner and a screaming infant does not give confidence you will get the message. Ensure you can be contacted, always phone back promptly and remember commercial clients will not bother to phone you after 5.30.
Control In the chapter “Cooking the Books” I list some of files to keep for control and analysis. At this point I am going to explain some simple rules to be kept in mind so that you have some idea of “where you are”. In my early days I set up a company from scratch and it seemed to be going very well. In the second year my Bank Manager happened to comment that my overdraft seemed to be high and rising. When I looked closely it was clear something was wrong. I contacted my accountants who sent along a new young enthusiast who quickly found that our previous accountant had made a major blunder. We were being totally misled as to our actual “profit”. In fact we were losing money. This discovery resulted in some serious and rapid reductions in costs and overheads and a very good (expensive) lesson for me.
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I had sunk myself totally in the new project and had not paid attention to the whole picture. Also I did not understand accounts and Accountants. So a simple first step - always read your bank statement. Whilst you will not end up as an Accountant (I hope) it is important to understand some of the “buzz� words. Remember I said previously that while your Accountant may ask questions of your figures you are responsible for providing them. Budget The planned value of costs and sales over a period Stock The items at cost you need to run the business Purchases Materials and services bought during the period Closing Stock The stock at the end of the period. Count very carefully. Work in progress Uncompleted work. Must not be claimed as Sales Margin The difference between costs and sales-hopefully PROFIT Direct or Fixed costs Costs that are essential for the business to operate Indirect or Variable costs Costs that move according to the volume of the trade These costs are the most likely to be examined looking for savings.
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Some examples Fixed
Equipment
Office
You
Variable
Telephone
Heat and light
Stationery
Petrol and vehicle costs
Wages
Your wages This list is only limited by your ability to incur them. Be ruthless.
SALES If your planned sales are not as good as you want you may consider reducing your margin to make your product more competitive. This will require an increase in volume to compensate. You may try to increase sales by adding sales time but this may increase your indirect costs i.e. vehicle costs etc.
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COST OF SALES This is the area where the most original thinking is required to cut costs without destroying the business. Can I work with less staff? Can we reduce our stock levels? Can we reduce the cost of stock? Can we get someone else to deliver stock? Can you work for less money and give up golf? This last item is to illustrate that you are possibly the most important asset in the business and a lack of attention can be fatal.
Summary By its very nature the type of plan and the detail required will depend on the CASH demand of the proposed start up. The higher the need the more detailed the plan as you may have to convince people other than yourself to back you with their money. After all this emphasis on planning and control you may be wondering if it is worth the candle as we seem to be doom oriented. Let me encourage you that many people running their business have not got to this point and will live to regret their lack of attention. So now we can lie back and bask in the attention of our peers because we are so clever. Like hell you can. The plan needs care and attention all through its life. You have to check that it’s “all according to plan” and if not why not and what you intend to do about it.
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I have just read the statement of a major company that went bust. “In spite of fantastic response to the product too much TIME was spent in research and development and we ran out of CASH ahead of the PLANNED SALES being achieved”. My capitals but perhaps the company should have had it in capitals. Go on then you know SELL DO CASH and PLAN ACTION and CONTROL—don’t you!
MONEY It can sometimes be misleading to harp on about cash. We tend to think of cash as something in our pockets. When you start up you will have to consider sources of finance and where you can get your grubby paws on it and what it is going to cost. I visited a very famous entrepreneur when he had just launched his “big idea”. He was out! But talking to the people on site it was clear he had been backed by his family putting in money. That particular project finally sank without trace but it generated enough interest to get him funded for the major work that made his name. So where can we get money? There are a number of Bank and Government schemes coming out and most are not to your great advantage.
Sources 1. Your savings This allows you to keep control as long as you have enough. 38
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2. Your family or friends Probably the cheapest form of finance but don’t forget the risks of losing their money 3. The Bank Will want collateral i.e. your house or something valuable and will require strict planning and reporting-if you can get a loan! 4. Investors Remember the loss of control so go carefully. 5. Factoring When you are running they will offer to pay a percentage of your Sales invoice for a fee. Good for cashflow but they may only accept your best credit worthy clients and will grab money back if anyone defaults-good isn’t it.
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Chapter 7 Cooking the books You remember that in the chapter CASH I exhorted you to get two lever arch files and mark one Purchases and the other Sales. Apart from keeping your desk tidy this enables you to start a simple book keeping system. As you collect invoices number them and keep them in the appropriate file. You then need to create two records.
A Purchase book
A Sales book
A lot of people do not bother to keep books and many try to cook them. There are two main reasons for working hard at your books: You will have clear records for analysis. You will save time and money with your Accountant the Tax man and the VAT man etc. etc. You will have to set aside precious time to record information and make a conscious effort to keep up to date. Without this information you may become "out of date". I know a lot of people, who fiddle for £10, try to evade Tax, and hoard cash under the bed. Stay in control-get out and make a profit, pay tax and sleep at night.
Analysis The level and complexity of analysis will depend on your business and ingenuity. The figures can be used on a daily, weekly, 40
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monthly or annual basis to be translated to your need for PLAN ACTION and CONTROL. To set up your system use simple headings that will enable you to file incoming/outgoing paper in a clear way.
SALES LEDGER Invoice Invoice Customer Nett No. Date Value
VAT 20%
Invoice Date Total Paid
This allows you to record all out going Invoices. This would normally be on a monthly basis. The most important column is, of course, Date Paid. We are also recording VAT.
PURCHASE LEDGER Invoice Invoice Supplier Nett No. Date Value
VAT
Invoice Date Total Paid
Now you can total up your outstanding creditors and plan your cash outgoings. With these two records you can check your Bank Statement.
VAT Many people are afraid of VAT but if we must have taxes this is one of the simplestTotal Sales VAT less Total Purchase VAT = VAT to pay.
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And of course you have just set up a system that records VAT. There are some wrinkles such at Zero rate, no VAT on some items but in the main it is straightforward.
There are a number of ways you can pay VAT and it is worth talking to your Accountant to find the best way for you. You can also go online and read the VAT rules. Also the VAT offices are generally helpful. I know that a lot of people try and stay under the VAT threshold and therefore limit the potential of their new business. If you are going to be worth anything get up and grow and earn real money. Remember, however, to look at your results nett of VAT. It’s not your money and if you treat it as such you could have a nasty surprise one cold morning when there is a knock on the door.
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Glossary of Terms AARDVARK Every list should start with one. ACTION Things to do when the Plan is not working. ASSETS Worth having. Should be higher than liabilities ACCOUNTANT A necessary evil. Get a good one and limit your costs by keeping your paperwork up to date. BUDGET Your best guess to the road ahead. BANK MANAGER Bring him out of the cupboard occasionally. BRIBERY Best left to the experts as it’s your money you are losing. CONTROL Try and exercise some. COST of SALES Create as few as possible. CASH Yes please and as soon as possible. CASH FLOW Remember TIME. CREDIT Take as much as you can afford and give as little as you can. DO What it’s all about. DOWNSIZE How to become self employed EMPLOYEE Person who takes an hour to do a job you could do in half an hour. FRANCHISE If it was that easy everyone would do it. FACTORING An expensive way to borrow money. GROSS PROFIT Better if it is greater than costs. HOUSE What the Bank Manager wants LIABILITIES Should be lower than assets MARKETING You know the business is out there somewhere PLAN A rough guide to the future (see Budget). 44
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PARTNERSHIP PURCHASES START UP COSTS STOCK SELL TIME TAX MAN VAT MAN ZEBRA
The worst ship ever launched Only as much as you need. Doncha just love them Don't let it lie on the shelves You've got to do it It always takes longer than you expect. If you are paying tax you are making a profit. See Tax man That reminds me of a joke
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